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Updating Life Insurance Beneficiaries
Have your circumstances changed since you applied for life insurance? It could be worth updating who will receive the benefit payment.
You can generally change the nominated beneficiary on your life insurance policy at any time as long as no claimable event has occurred e.g. a death of the policyholder.
To change the beneficiary on your life insurance policy you'll need to complete a nomination of beneficiary form and complete the form depending whether you would like to:
- Nominate more than one beneficiaries
- Nominate your estate as the only beneficiary
- Cancel all of the current beneficiaries on your policy
Find Out the importance of having an up to date life insurance policy
A life insurance beneficiary is the person/persons nominated to you receive the benefit for the sum-insured in your life insurance policy in the event that you pass away or are diagnosed with a terminal illness with less than 12 months to live.
Beneficiaries are nominated at the time of application with applicants able to allocate the proceeds of their policy to ensure that each beneficiary receives the correct amount of money. In the event that a benefit is paid, this nomination must be upheld by the insurance provider. Beneficiary nominations are legislated under the Insurance Contracts acts of 1984.Back to top
While most people will nominate their spouse and children to be their beneficiary, applicants have the ability to nominate anyone to receive their benefit payment. It can be given to a family friend or to ones parents, the only prerequisite is that they are over 18 years of age.
As many people will wish to leave their benefit payment to their children, and in most circumstances their children will not be over 18 years of age, all that has to be done is for the applicant to clearly state in their will that the benefit is to be given to their dependent children. In the event that both the insured and their spouse passes away, this will ensure that the benefit is still given to their children and will remove the risk of a legal battle or confusion ensuing.
Most policies will allow applicants to apply for up to 5 beneficiaries to receive a benefit in the event of their death. Each of these policyholders can receive a shared amount of the benefit or different portions. It is worth noting that the greater the number of beneficiaries there are on the policy, the more difficult the claims process can be.
Who is eligible to be a beneficiary for a super fund life cover benefit?
A binding nomination for a super fund life cover benefit can be made for the policyholders:
- Their child or their spouses child
- Child that has been adopted
- Any person that was in a dependent relationship with the policyholder at the time of their death
- Any other person that were in anyway financially dependent on the policyholder at the time of their death. This must be approved by the Trustee.
When you review your life insurance policy, it is important to consider whether the people you wish your benefit to go to are the ones who will actually receive it. This is not guaranteed, because if you are the sole policyholder and you have not made it crystal clear who your beneficiaries are to be, then the life insurance benefit could be paid to your estate in the event of your death, to be distributed by your executor.
If you have been married more than once or have children from a previous marriage, this could complicate matters and lead to monies being distributed at the executor’s discretion. The benefit could also be used to pay off any debts the estate owes before your beneficiaries see any of it.
Even when the distribution is relatively straightforward, unless you have made legal provisions to ensure your benefit is distributed according to your wishes, the matter may be tied up for some time before being resolved, which could lead to financial hardship for your loved ones.
What happens if a policy beneficiary passes away?
In the event that a beneficiary passes away and no new beneficiaries have been nominated, the sum insured will be returned to the policyholder. If the policyholder is the same person as that who owns the policy, the benefit will be distributed to the estate as per the beneficiaries will.
If both the beneficiary and policyholder pass away at the same time, the benefit will be distributed as per the policyholders will.Back to top
When reviewing your life insurance policy, looking at the policy ownership is one way to make your cover more effective. If you are the life insured and the sole policy owner, then as mentioned previously, the benefit paid on your death is likely to go to your estate.
To avoid this, you may wish to consider making the person you want to benefit from the policy the owner of the policy. However, while this will ensure your beneficiary receives the benefit rather than your estate, it could be problematic if the beneficiary was your spouse and you were to become estranged or divorced, as you would then have no control over the policy.
As well as self-ownership, other forms of policy ownership include:
- Cross ownership. No longer popular due to the introduction of Capital Gains Tax (CGT) on compensation for injury or illness when someone other than the insured or a relative receives it.
- Joint ownership. While more affordable than two single policies, it only pays out once on the death of an owner and the other owner(s) are left with no insurance.
- Tenants-in-common ownership. Where benefits are received by the owner in proportion to their share in the policy. Not offered by many insurers these days.
- Business entity ownership. Where the policy is held for a revenue purpose. Here the business can claim a tax deduction for the premium and have the proceeds under its control.
- Super fund ownership. A popular option, as the premiums are funded by tax-deductible contributions and are tax deductible themselves.
When considering ownership during your policy review, it would be wise to seek professional advice from your insurer, adviser or financial consultant, as the implications of ownership can be complex and far-reaching.Back to top
The other way to ensure that the right people receive the proceeds of your life insurance is to choose a policy that allows you to nominate your beneficiaries.
As the owner of the policy, you can nominate which beneficiaries are to receive what proportion of the benefit (must add up to 100% in total). This method allows you to remain in total control of the policy and also to direct the proceeds to the right beneficiaries.
The only drawback with this is if your policy is held within superannuation, as superannuation law states that the beneficiary can only be a dependant or your estate executor and that person will receive all of your superannuation, including your life insurance.Back to top
So, how do you make sure the ones the benefit goes to the right person? One way is to have an up-to-date will as part of your estate plan, which clearly identifies your wishes.
Another way is to choose a life insurance policy that contains inbuilt mechanisms to simplify and speed up the payment process. Many modern life insurance policies do this by allowing you to nominate ownership of the policy and also who your beneficiaries are to be.Back to top
The other way to ensure your beneficiaries receive the proceeds of your life insurance policy fairly and in a timely manner is to have an up-to-date will in place as part of an overall estate plan. A will not only directs the proceeds of your life insurance to the right people, but also ensures the correct distribution of the other assets that make up your estate.
A comprehensive estate plan would also cover circumstances such as power of attorney, where you nominate another person to make decisions on your behalf, should you be unable to do so.Back to top
As you get older, it is inevitable that your life insurance needs will change, which is another reason why it is important to review your policy on a regular basis. Possible changes to your circumstances and therefore your insurance needs can include:
- Change in family makeup. Children can leave home and start their own families and you may wish to extend cover to new grandchildren as well. Alternatively children could divorce and return home, requiring re-inclusion in your insurance cover.
- Change in finances. You may pay off your mortgage, reducing the amount of cover you may need or alternatively, you may suffer a financial loss and accrue debts, requiring additional cover.
- Change in health. As you get older, you are statistically more likely to become ill or injured, so you might wish to consider increasing your cover earlier, as the older you get, the more expensive this becomes.
When do you need to update your beneficiaries?
There are another key events that could trigger the need to update who will receive the benefit of your policy in the event of your death. Such events could include:
The nomination of beneficiaries an extremely important component of taking out life cover. Many unforeseen changes can happen over the life of a policy and reviewing if the lump sum benefit will be given to the right parties is critical.
Why should you regularly review of your policy so important?
In addition to the importance of ensuring your policy will pay out a benefit to the correct beneficiaries, it is also critical for policyholders to undertake regular reviews of their policy to ensure they have the right level of protection in place. As circumstances change it is important to adjust the sum-insured accordingly. Key events that could bring on this change include:
- Birth of a child
- Change in income
- Children move out (no longer dependent)
Another consideration when reviewing your life insurance policy is whether you are still getting good value for money. Some of the indicators of good life insurance cover include:
- Inclusion of a terminal illness benefit as well as death cover
- Premiums are automatically adjusted in line with the Consumer Price Index
- Guaranteed future reliability (can be renewed without further medical underwriting)
- Funeral advancement benefit covering immediate funeral expenses
- Additional options such as trauma cover, income protection and TPD cover
- Benefit discounts for various levels of cover
- Choice of stepped, level or blended premiums
- Choice of fortnightly, monthly, six monthly or annual premium payments
- Contact your estate planner. In the event that your child is under 18 years of age, you may be required to contact your estate planner attorney to let them know of adjustments to your beneficiary nomination.
- Contact your life insurance company and obtain the appropriate documentation. Most insurance providers will require to fill out a change of beneficiary form. Some of these will be available to be filled out online while others will require you to print them out and mail them through to them. It is best to contact your provider over the phone if you are unable to locate the documents online.
- Fill out the necessary documentation. Fill out necessary documentation completely. Contact your insurance company if there are any components that you are unsure.
Life cover through superannuation is different to standard retail life cover as the benefit payment will paid to the fund trustee who will then distribute it to the beneficiaries as they see fit. This can result in a delay in the benefit being given to the beneficiaries and a risk of the benefit not being paid to the policyholders preferred beneficiary. Risk of this occurring can be reduced with a binding death benefit nomination.
What is a binding death benefit nomination?
A binding death benefit nomination is a written nomination to the Super fund Trustee that outlines the policyholders dependents and legal representatives that the policyholder wishes to receive the benefit for the sum insured in their policy in the event of their death. A binding death benefit nomination can be made at any time.
This nomination can remain in effect for a period of up to three days from the date that it has first been signed. The Fund Trustee must first receive and accept the nomination before it can be put in place.
Life insurance beneficiary tax treatment of super fund life cover
Applicants for life cover through superannuation should be aware that their benefit payment can be subject to tax in the event of their death if the beneficiaries are not financially dependents. This could include beneficiaries that are not a spouse, over 18 years of age, not financially dependent on the policyholder. A tax rate as high as 16.5% can apply.Back to top
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